DOWNGRADE AND JUNK STATUS LOOMS ON THE HORIZON FOR THE SOUTH AFRICAN ECONOMY: FINANCE MINISTER IN A NO WIN SITUATION AS TOXIC POLITICS TAKES ...
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International Journal of Accounting Research (IJAR)
Vol. 2, No. 11, 2016
DOWNGRADE AND JUNK STATUS LOOMS ON THE HORIZON FOR THE
SOUTH AFRICAN ECONOMY: FINANCE MINISTER IN A NO WIN
SITUATION AS TOXIC POLITICS TAKES CENTER STAGE
Anis Mahomed Karodia
Professor, Academic and Senior Researcher, Regent Business School, Durban, Republic of South Africa
Email: akarodia@regent.ac.za
Ridwan Asmal
Lecturer in Accounting and Finance, Academic and Researcher, Management College of Southern Africa
(MANCOSA), Durban, Republic of South Africa
Paresh Soni
Academic and Institutional Research Manager, Management College of Southern Africa (MANCOSA),
Durban, Republic of South Africa
Joseph E. David
Senior Academic, Regent Business School and Former Administrator of the Durban Ethekwini Municipality,
Durban, Republic of South Africa
Abstract
There grave and serious concerns that confront the South African economy. This article looks at the
South African economy, in terms of the possible downgrade to “junk” status that looms on the
horizon by rating agencies. It will therefore, look at re - called South African Finance Minister
Pravin Gordhan’s 2016/2017 budget statement (February, 2016), to analyze and determine whether
his budget statement can place South Africa on a growth path, in order to avoid a sovereign ratings
downgrade by rating agencies. This budget will be the most important budget post democracy in
1994 and, after twenty-one years of freedom. It is blatantly important from the perspective that the
South African economy is in shambles and in complete tatters because of the grave mistakes made
by Jacob Zuma, the Machiavellian President of South Africa.
The issue at hand is whether the Finance Minister, can save the day and, steer the South African
economic ship to calmer and safer waters and, therefore, will he be in a position to pull South Africa
out, from the inevitability of a junk status economy by ratings agencies. He needs to restore
confidence, credibility and clearly show the pathways that his budget will employ, in order to secure
economic growth, assure investors that the country is a safe investor destination, allow for greater
foreign direct investment but, above all, assure the South African nation that, he is in a position to
pull the country out of its economic quagmire by applying strict fiscal consolidation measures,
curbing government’s wasteful expenditure and, the rapid rise of public servant salaries and, ensure
economic growth and deal decisively with poverty, inequality and high rates of unemployment,
50International Journal of Accounting Research (IJAR)
Vol. 2, No. 11, 2016
including other important and salient economic issues. The authors will outline some other issues
pertinent to this paper and, will then analyze the budget put forward by the Finance Minister.
Key Words: Budget, Fiscal, Economy, Consolidation, Downgrade, Junk Status, Rating Agencies,
Confidence, Credibility, Economic Growth
METHODOLOGY
The paper does not use any classical research methodology that is usually used in research. It will
rely on the observations of the authors in this regard and, will use and, rely upon the articles that
have consistently appeared in the South African press over time. This methodology will in no way
compromise the narrative nor will it hinder the analysis being undertaken in the discussion of this
paper. This approach will in no way dilute the thrust of the paper and, will consolidate the arguments
put forward in the previous two papers.
AIM OF THE PAPER
The cardinal aim of the paper is to project upon the possibilities of an economic and fiscal
downgrade of the South African economy that is an increasing possibility, because of the
mismanagement of the economy by the South African government. To analyze and criticize the
Minister of Finance’s 2016 / 2017 Budget statement and, to determine if the Finance Minister, tabled
a credible budget that could save South Africa from a sovereign ratings downgrade.
LITERATURE REVIEW
There will be no literature review that will be undertaken because the paper does not lend itself to a
literature review and the readers are therefore, requested to read the other two previous papers
published in this journal, concerning the fiscal and economic crisis that South Africa currently
confronts.
OBJECTIVES OF THE PAPER
There are no specific objectives that the paper talks to or discusses because, the issues that will
be raised in the discussion is par for the course, in terms of the very dire fiscal and economic
crisis and, discourse that currently confronts South Africa.
The primary objective being to critically analyze the economy and government’s intervention
strategies, in order to remedy the situation via the Finance Minister’s much awaited budget
statement.
Does the government of South Africa have a plan to intervene and set the country into a path
and trajectory of economic recovery and, fiscal consolidation by placing it onto an economic
growth path and, in so doing can it take the country out of the economic morass that has been
created by the ruling government and, its President.
Will the newly appointed and recalled Minister of Finance be in a position to outline, a
consolidation plan in terms of the economic recovery of the South African economy through his
budget statement to the nation? In other words does he have the wherewithal to stand up to his
Cabinet colleagues and, the President in terms of intervening decisively to save the South
African economy from complete ruin?
Can the South African economy be saved and, can the country be bailed out to a path of
recovery for the nation and its people?
Or is it a case that the budget presented by the Finance Minister will be one that will stave off
an immediate downgrade of the economy to Junk status or, will it be an immediate band aid
solution but, the inevitability of junk status will loom on the horizon once again in about 12 to
18 month’s time?
51International Journal of Accounting Research (IJAR)
Vol. 2, No. 11, 2016
CONCLUSIONS
The paper will make some conclusions at the end of the narrative. In so doing it will make either
positive or negative conclusions that will also be dispersed throughout the narrative.
RECOMMENDATIONS
The recommendations emanating from this paper will be made at the end of the paper and
discussion. By the same token the recommendations will be dispersed throughout the discussion in
the narrative and, will mainly point to the economic and fiscal crisis and, allude to the fact that, a
downgrade is inevitable and, show the consequences that will result if this happens. This will be
dependent upon the budget of the Finance Minister, which for all intents and purposes must talk to
tightening belts, fiscal consolidation and an improved climate for economic recovery and growth.
CONCLUSION
The conclusion of the paper will talk to the hope that South Africa’s economic situation can be
improved or that, it will slide even further into the abyss of total ruin and, thus, become a failed and
pariah state in the eyes of the world and, therefore, to the peril of the nation, particularly the poor. It
will also allude to the obvious reality, if the Minister of Finance presented a credible budget to save
South Africa from a sovereign ratings downgrade.
ETHICAL CONSIDERATIONS
There are no ethical considerations that the authors need to take into consideration. This is premised
on the view that the economic and fiscal crisis that confronts South Africa is widely known in the
country, across the African continent and by implication globally. Issues of this nature are therefore
important to the people of South Africa and, economists at large and, therefore, the issues raised in
this paper breaches no ethical considerations.
INTRODUCTION
South Africans from all walks of life should prepare themselves for some tough medicine when the
Finance Minister presents his Budget. Perhaps February 2016 will be the most important month in
the history of democratic South Africa after 21 years of democracy, and will largely determine, if
South Africa will be declared a “junk” status economy by rating agencies. If this happens South
Africa can then be considered a failed state on the brink of total economic disaster and collapse. The
nation waits with bated breath to see these outcomes. The Editorial of The Mercury (2016: 7) states
that “local and international factors have combined to make this one of the most difficult times
financially for the country. These include a global slowdown spurred in part by China’s relatively
sluggish economy and consequent drop in demand for goods; the slump in the international price of
oil on the back of diminished demand and increased supply; and South Africa’s worst drought in 23
years amidst a host of other internal factors, well known but to many to enumerate that, have
compromised and virtually destroyed the economy of South Africa, under the current President, his
inept Cabinet and the ruling African National Congress.”
Growth figures of the South African economy are constantly being revised downwards, and the
Finance Minister is attempting to lead a rearguard action to prevent rating agencies from
downgrading South Africa to “junk” status. This is a more than difficult task to achieve in the short
term. This would no doubt increase the already stupendous cost of government borrowings, and lead
to a flight of foreign capital as international financial institutions,’ mandates forbid them from
investing in countries that have “junk” investment ratings. Given this scenario, there is nothing
citizens can do about possible increases in personal and business taxation rates, a hike in capital
gains tax, increases in fuel levies or even a rise in Value Added Tax (VAT) rate. This is further
exacerbated by a possible 16.6 percent rise in electricity tariffs given the crisis of electricity load
52International Journal of Accounting Research (IJAR)
Vol. 2, No. 11, 2016
shedding. The South African regulator allowed a 9.4 percent electricity hike to Eskom, from the 1st
of April, 2016 and, did not accede to Eskom’s request for a 16.6 percent rise. This will most
certainly affect the consumer because the 9.4 percent rise is above the inflation rate and that,
consumers are reeling with constant rising prices and increased interest rates and as food prices rise
drastically. Eskom has indicated that the rise of only 9.4 percent will now force them to look for
funding from lending agencies and that, South Africa must broach itself, for the possibility of
increased load shedding in 2016. Amongst these, there are numerous other issues that will be
unpacked in this paper.
Given the dire straits that the South African Economy is in, the Finance Minister shocked the
African National Congress (ANC) conference recently when he dropped a bombshell by proposing a
cut in social spending as one way government could cut costs amidst an increase in economic
difficulties” (Letsoalo and Donnelley, 2016: 2). The Finance Minister listed eight areas for
consideration by government to deal with the widening budget deficit. These were as follows:
“Social Spending: This is the lynchpin of ANC policy and the basis for much of its previous
election campaigning. A cut back on social spending.
Government should curtail excessive spending on luxuries like spending on fancy cars for
Cabinet Ministers.
A freeze on the high public servant salaries and reduction of employment.
A relook at the social grants policy that is placing strain on the government fiscus.
Reducing wasteful expenditure.
Unspent money by government departments must be returned to the Treasury in order to plug
budget gaps.
Stopping the use of very costly consultants.
The inevitability of a hike in taxes to balance the books. A move that would be generally
unpopular” (Letsoalo and Donnelley, 2016).
The ANC generally did not agree with the Minister and the labour union federation Cosatu was not
impressed and, this extended to the South African Communist Party (SACP). All of them did not
support his call to cut social spending and a freeze on salary increases. The Secretary General of the
ANC said the party would not support the move to cut back on social programmes because, it would
create a crisis in the country and, that poor people must be protected. Cosatu on the other hand said
that, there is much poverty and, there has to be the provision to quality healthcare, higher education
and technical training, housing and other material and cultural needs. The SACP indicated that
cutting social spending will amount to sentencing most of them (the poor) to social death” (Mail and
Guardian, In Letsoalo and Donnelley, 2016: 2). All of this might be true but, these alliance partners
of the ANC, including the ruling party have had a historic propensity of spending money without
accountability and, could not curb the overt corruption in government overtime and, also after 21
years of democracy lost the opportunity to deal with the issues being raised decisively and, to the
benefit of the majority poor population of the country. Political patronage through the ranks of its
elite has exacerbated the economic problems and, moreover, they just do not understand the fiscal
and economic crisis that the government has created and, the impact upon South Africa and its
citizens and business in general. It points to the reality that the Finance Minister will have no room
to maneuver or placate his party and, the alliance partners that South Africa has to drastically scale
down spending in order to avoid the inevitability of a ratings downgrade to “junk” status. The month
of February, 2016 given the State of the Nation Address by the President and the Finance Minister’s
Budget Statement, will determine the economic route that South Africa will be taking, and this will
53International Journal of Accounting Research (IJAR)
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determine whether the Finance Minister has any clout or will he be ranked in the history of the
country as a “lame duck.” “In terms of the economic indicators South Africa is in recession
according the Financial Mail (2016: 47) and would not come out of it this year believed consumers.”
South Africa is spending more than it is earning and international rating agencies are keeping a close
eye in upcoming national budgets, with the cost of borrowing for crucial infrastructure projects by
the likes of Eskom (electricity supply commission) in the balance.
The biggest outflow since 2008 casts a harsh light on policy direction and the trade deficit. This will
therefore be a tall order for the Finance Minister to rectify. According to Gedye (2016: 24) “Foreign
investors pulled R12.8 billion out of the country in just one week this year. This was foreign capital
invested in the Johannesburg Stock Exchange (JSE), listed equities and South African government
bonds. This was the largest withdrawal since the 2008 global economic crisis and the fourth highest
in South African history. A further R16 billion in equities and bonds occurred in November and
December of 2015. The cause is market turmoil but more important was Jacob Zuma’s catastrophic
decision to fire then finance minister Nene and, the subsequent fall of the rand. A repeat of last
year’s mini – budget will not be good enough. South Africa needs to be more stringent than that.”
The balance of current account payments, the country relies on foreign inflows into its equity and
bonds markets. If these dry up, it can cause a balance of payment crisis, which would mean the
government would have to find this money elsewhere, such as through loans. This is the stark reality
and, if the money cannot be found, imports would have to be cut back, which would cause the
economy to drastically slow down. It is therefore not inconceivable that South Africa will rush to the
International Monetary Fund (IMF) to get money. This will be the beginning of drastic structural
adjustment programmes and thus selling the country to capitalism. A danger that must be averted.
On the other side of the equation is that, the country can and will be blow out of the water. We just
cannot take on the market and we can only make the rand look more attractive by putting up interest
rates. “South Africa imports more goods than it exports and therefore runs a trade deficit, with the
country paying out more money to its trading partners that it receives” (Gedye, 2016: 24). It is
therefore obvious that borrowing money to solve a balance of payments crisis will be putting off the
day of reckoning and this cannot be done indefinitely.
MINISTER OF FINANCE MUST TRY A RESCUE FOR ‘JUNKYARD STATUS
There is no doubt that things could hardly be worse and unpopular decisions will have to be made in
an election year. It is hardly likely that the ruling ANC and its alliance partners will stomach
unpopular decisions by the Finance Minister. The Minister sits between a rock and a hard place. Can
he restore the country’s credibility and, will he be allowed to inflict painful decisions can only be
keenly watched. The picture is even bleaker given the fact that the World Bank in February, 2016
dropped its forecast for South Africa’s economic growth to 0.8 percent for 2016, down from 1.3 in
2015. This leaves the Finance Minister and the government in general, with almost no road to avoid
making some very difficult, and politically unpalatable, decisions about government spending,
particularly in an election year. Irrespective of whether the South African government can stave off
the inevitability of an almost certain downgrade by rating agencies, the reality is that the South
African economy is in tatters and, will get worse under the present ruling party government. This is
exemplified by the fact and reality that the current level of the exchange rate and, the domestic bond
rates suggest the market has already priced in a rating downgrade. According to Nazmeera Moola, a
strategist at Investec Asset Management (2016:30) said that “South Africa stands to lose its
investment grade rating with one of the three major ratings agencies, Standard and Poor’s. It has
rated South Africa at BBB, with a negative outlook and has two years to decide whether to lower
54International Journal of Accounting Research (IJAR)
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this grade or remove the negative outlook and keep the BBB grade.” Attrition is the only way to curb
growth because the government has no appetite to take hard economic decisions in terms of the state
wage bill, social grants, education, the implementation of the National Health Insurance, the
electricity problems, the implementation of nuclear power at a great cost, failure to address
corruption and productivity, curb capital outflows, failure to curb the workings of inefficient state –
owned enterprises, the drought and, does not want to bail out agriculture, failure to curb illegal
immigration, reduce the inefficient Cabinet Ministries from 35 to a workable number like other
European and mature democracies. In reality there has to be a dramatic intervention strategy to get
the South African economy working again and, to place it on a path of economic growth. This will
not be achieved nor undertaken by the current government. The Finance Minister has no room to
maneuver under the present government. No Finance minister in the history of South Africa has had
to walk a tightrope as difficult as Gordhan. “Irrespective of the presentation of his Budget the
Finance Minister has to be transparent, bite the bullet and hold the President, the labour unions and
all the alliance partners at bay and, if he could achieve this which is most doubtful, he will be judged
on how and where tax collections are spent” according to Kader (In Donnelley, 2016: 30).
There is no doubt that acquiring “junk” status could lead to economic disaster for South Africa.
Maswanganyi (2016: 2) indicates and states that “South Africa is teetering on the brink of a ratings
downgrade cliff. Should rating agencies pull the trigger, the spectre of economic disaster looms
large? The cost of servicing South Africa’s bulging R1.8 trillion debt loads will spiral; the country
will be booted out of the World Government Bond Index, making its bonds untouchable; and the
capital outflows will be swift and devastating to an investment – starved economy. SA Inc. is flirting
with disaster and is fast approaching an economic iceberg. The issue is - will South Africa’s captains
steer the ship to safety or will the band fiddle away into thy night?” Of the 18 sub – Saharan African
countries that Standard and Poor’s (S&P) rates, Botswana and South Africa hold coveted investment
– grade ratings. The rest have speculative grade status, an ignominy SA is best advised to avoid.
Investors look askance at such states, as their chances of defaulting on debt repayments are high,
which makes borrowing a costlier exercise for these countries. A downgrade is usually followed by a
downward revision for state – owned companies, banks, and municipalities that borrow on
international markets. The consequences of a downgrade for SA are writ large and in addition to
capital outflows, the rand may touch as yet unimaginable lows. With a downgrade SA will join the
sub - investment – grade club. Given all the arguments there is only one option left for the Finance
Minister, he has to cut the budget deficit. South Africa’s bulk debt is denominated in the local
currency, while 10 percent is denominated in foreign currency. This gives the country some
breathing space should a downgrade be in the offing. This can only be achieved in terms of a lower
deficit with tax hikes and drastically slashed state expenditure. Given the South African governments
mismanagement of the economy, its lack of fiscal consolidation in trying times and, its propensity to
spend without checks and balances, the high public sector wage bill and its reliance on appeasing its
alliance partners; this will not provide a winning formula to take the country out of its economic
quagmire.
MOODY’S TAKES TOUGHER LINE AS IT FLAGS HIGHER RISK OF DOWNGRADE
Moody’s, the rating agency has been the most optimistic of the top three about SA, has changed its
tone, bluntly warning on the 4th of February, 2016 that weak economic growth and lower tax
revenues would lead to a credit rating downgrade according to Maswanganyi (2016: 1). The World
Bank also warned of rising poverty and SA was flirting with recession. “Tepid growth would hamper
infrastructure investment, lowering potential long term growth, contributing to high unemployment
55International Journal of Accounting Research (IJAR)
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and worsening social tensions” said Moody’s (In Maswanganyi, 2016: 1). It downgraded the South
African economy from its 0.8 percent projection to 0.5 percent growth in 2016.
RECESION NOT ON THE HORIZON SAYS THE FINANCE MINISTER
In typical rhetoric and playing to the gallery, Finance Minister Gordhan said in Cape Town that “The
economy was not in recession and was not projected to slide into one, whatever doomsayers might
say according to Ensor (2016: 1). Economists, however, strongly disagree with the minister’s
positive spin on South Africa’s economic outlook, saying that a recession, technically two
consecutive quarters of contraction is highly likely this year. The Treasury is due to update its
growth forecasts for the next three years when the minister tables the 2016 – 2017 budgets. They are
expected to be lower than the projections made in the October medium – term budget policy
statement. Rejecting the possibility of a recession in the near term, the minister pointed to World
Bank forecasts for SA’s growth for the next three years which ranged between 1.4 and 1.6 percent.
But economists pointed out that while the annual growth rate might be positive, a recession could
occur within it. Lefika Securities chief economist Garrow (In Ensor, 2016: 1) said that “The odds
were stacked against South Africa. Apart from the state of the global economy and the fallout in the
commodity markets and the rand exchange rate, there was the drought and rising interest rates
domestically. Mining and manufacturing production figures were also pointing in one direction. It is
just a question of timing when SA is going to fall into recession or in reality is already in recession. I
would like to know were the minister thinks the growth is going to come from. A crisis of our own
making is unfolding. Our policy mix is totally out of line. Monetary and fiscal policies were not
synchronized to stabilize the economy.” According to the authors and in terms of their observations
the fact is that, government has not come up with any mitigating package of policies that would
either stop the rot or reinvigorate growth. If left to it, the economy will go into recession and
therefore, to underestimate the severity of the contractionary momentum under way would be a great
folly.
On the other hand what the minister does not factor into his spin is the all - embracing reality that the
United States economic recovery was likely to result in rising global interest rates, while the
tightening of monetary policy would put pressure on capital flows and growth expectations. Capital
market volatility would increase significantly. By the same token South Africa is beset by structural
problems, including electricity supply constraints, severe water infrastructure problems and a severe
drought amongst a host of other constraints including very poor governance, poor accountability and
mismanagement in almost all sectors of the economy. The minister paints a picture of real optimism
in order to place SA in a different direction but, the reality is that this optimism has waned under the
present government. However data shows that the economy is in the doldrums. To this end
Maswanganyi (2016: 1) shows that:
“Manufacturers and traders expect the business environment to deteriorate further.
Traders expect sales and new orders to decline because of weak demand.
Business conditions remained below 50 for a second consecutive month.
The manufacturing outlook for South Africa was likely to remain difficult, given weak domestic
demand and a challenging international environment.
Growth in household spending is expected to be more than modest as consumers grapple with
rising interest rates and food prices.
Looming electricity tariff increases will also erode disposable incomes.
Input costs and selling prices were expected to rise in the first half of this year.
56International Journal of Accounting Research (IJAR)
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Low confidence levels among traders suggest that investment and job creation will be strained
and that, economic growth will slow further.
Subdued demand, lower export volumes, rand depreciation, escalating interest rates and slowing
growth in household spending weighed on confidence and the economy.
Input costs were rising due to a weaker rand.
Although the PMI rose to 45.5 points, it was still below the 50 point mark showing expansion
and has trimmed the GDP.
Mining production fell in November, 2015 compared with a year ago.
In January, 2016 data showed the manufacturing sector was on the cusp of a recession.
The contractions in mining and manufacturing, together make up 20 percent of the economy,
coupled with the drought, did not bode well for overall economic growth.
Mining production fell 0.8 percent in November, 2015 compared with the same month the
previous year, after contracting sharply by 4.7 percent in October of 2015.
Low commodity prices, high production costs and lackluster global demand are among the
factors that will curb output.
Labour unrest was a major risk for mining” (Maswanganyi, 2016:1).
BAND AID ON AILING POLICIES
The country is in deep trouble: high layoffs of workers add to South Africa’s high unemployment.
The country has a growth rate of below 1 percent and there is no prospect of a change in policy and
attitude by SA’s top leaders. In this regard Ann Bernstein (2016: 13) says that “The issues at stake
could not be more important in the short term as to how to manage the 2016 budget and stave off the
downgrade by rating agencies to junk status; more fundamentally, the future of the economy and the
nonracial democracy.” One of the great mistakes of business was a lack of a pronounced statement
amidst an unprecedented economic crisis because, it should have spelled out the consequences of the
president’s actions for all South Africans; indicated that he had single – handedly undermined one of
the major achievements of democratic South Africa, namely the creation of a world – class treasury
and global confidence in the country’s global confidence in the country’s fiscal management; and
stated it had undermined their confidence in how the country was being managed. It is nothing but a
sustained attack of the Cabinet led by the President of South Africa on the legitimacy of the country
and the pressure to do business with a government that is out of kilter. Business in South Africa has
been reactive and accommodating. They generally have opted for silence and this attitude by South
African business exacerbates the problems besetting the economy. There is just no robust
engagement by business in this regard.
Ann Bernstein (2016: 13) states that “In a democracy, public positions and participation inform
discussion and validate the role of business; it also prevents suspicions as to what exactly is
happening in behind the scenes discussions. A pliant business community that retreats from public
debate and shows a fear of the government. This is bad for the country and allows the Cabinet, the
President and the ruling ANC do act with impunity because, it sends out a signal that the government
is untouchable. In democracies the “public square” really matters. Business needs to participate in
the debate on how South Africa should deal with the challenges of the economy and the challenges
of unemployment, poverty and inequality.” In other words, in terms of business there is no coherent
business strategy or effective organization making a strong case to achieve the high and inclusive
growth South Africa desperately requires? Business has failed to engage effectively in the
democratic politics of the country. They have not made the case for much higher and more inclusive
growth. They have not made the case for national development or in putting forward practical
57International Journal of Accounting Research (IJAR)
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proposals on how dynamic markets and companies can help resolve the country’s many challenges
and, thus become a watchdog over a government that lacks a vision and compromises the principles
of accountability and the rule of law. In the final analysis Ann Bernstein (2016) points out that “At
this time of crisis in South Africa, it is not only the government that needs a fundamental change of
direction. Business needs a new strategy if it is to provide the leadership the country desperately
needs.” Business can no longer stand aloof and on the periphery as the country bleeds and moves to
economic destruction and, complete ruin under an inept ruling government. Business has to stand up
and voice its opinions and indeed government will have to listen.
MORE MISTAKES ON POLICY WIIL PUT SA IN JUNK TURF
Maswanganyi (2016: 1) points out that “A major rating agency has warned that a “policy mistake”
along the lines of former finance minister Nene’s firing would see South Africa downgraded to junk
status. That coupled with a failure to improve economic growth, was among the biggest risk factors
that could contribute to a downgrade. Policy mistakes can have a tremendous impact on the
exchange rate very quickly. Government as a whole needs to pull in the right direction.” The real
challenge that South Africa faces is that the socialists or communists in the ruling party, who are in
the majority, despite their aversion to credit rating agencies and, therefore, the talk about ignoring
them is a real problem for the economy.
OTHER FACTORS THAT WOULD ALLOW FOR A DOWNGRADE TO JUNK STATUS
OF THE SOUTH AFRICAN ECONOMY
The discussion thus far has painted the reasons as to why the South African economy is sitting on a
downgrade time bomb. Without further discussion the authors will continue the low road scenario by
listing other factors that will play a major role in a possibility of the economy being downgraded:
These are as follows and could also be considered as some conclusions of this narrative:
In South Africa the rich are getting richer and the poor are being relegated to the doldrums of
poverty.
The inability of the government to grow the economy and to this end we see rising poverty,
inequality and high unemployment as major concerns.
Can the Finance Minister in his Budget show South Africa still has what it takes to remedy the
economy?
The State of the global economy is no excuse for inaction in South Africa.
Unemployment in South Africa is on the rise according to the International Labour
Organization (Musgrave, 2016:15).
The IMF sees South Africa’s growth at a dismal pace.
The Effects of China’s economic slow – down will affect South Africa.
Political patronage and corruption which is now endemic is a major downside.
The constant bail – outs afforded to ineffective state – owned enterprises.
A bloated public service and high wages and a high population growth.
The bloodbath of the rand as a currency against all major currencies.
The market rout of emerging markets will affect the South African economy.
Consumer prices will sky rocket and affect the economy drastically. There will be a huge debt
squeeze for consumers because there will be at least a 10 percent food price increase. Food
shortages are looming threatening food security.
South Africa’s food – price inflation is not only about the drought but a lack of policy.
The President’s cynical take on markets.
58International Journal of Accounting Research (IJAR)
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The constant rise in interest rates.
The prolonged drought.
South Africa’s debt headache.
The recession alarm bells are a reality.
Goldman Sachs is betting against the rand.
Racism is a risk to South African growth.
The plunging ore prices and a fall of commodities.
The weak rand limits benefit of low oil prices.
Bonuses have to be curbed.
The trimming of the Cabinet is an essential.
Hiring more public servants must stop.
Factory slump threatens growth.
Irresponsible law making is costing South Africa and there is an absence of policy certainty.
Politicians talk of service to the poor but walk with the rich and powerful.
The fall in the rand cannot be blamed on banks but on government because of policy
uncertainty.
South African farmers owe R125 billion to the banks.
Growing concerns about the ANC leadership.
The ruling party despises competence and lauds loyalty.
A lack of will by the ruling ANC to enforce laws.
No unity and resolve as South Africa faces an uncertain future.
The above issues are by no means comprehensive in nature but paint a bleak picture, in terms of the
economic outlook and, speak to a myriad of problems and issues as concerns the low road to
development, urgent transformation of the economy and, almost speaking convincingly to the
possibility of a failed state.
GORDHAN – ZUMA RIFT BRINGS JUNK STATUS NEARER
In our previous papers we had alluded to the Minister of Finance being investigated by South
Africa’s Prosecuting Authority the Hawks. Over several days now after the presentation of the
budget by the minister, the SABC, ENCA, ANN7 television services and the South African media
on the 29 of February, 2016, has been reporting that “there is a war going on between the President
Jacob Zuma and the Finance Minister Pravin Gordhan and that, the President is fighting a proxy war,
using his comrade Tom Moyane (He was a comrade and family friend in exile with the President
and, is much younger and, was personally appointed by the President to the position of
Commissioner of SARS, a classic case of patronage because the Finance Minister was investigating
the President and, reports suggest that there is a dossier which implicates the President and some of
his cronies in huge financial scandals. It is for this reason that the President wants the Finance
Minister out, before the issues becomes public knowledge and, can implicate the President and
others very seriously). The Commissioner of the South African Revenue Services (SARS) (Gordhan
was Commissioner of SARS previously and was responsible of transforming it to be one of the most
efficient institutions in the country), and the Hawks have been instructed to investigate the minister
for forming a rogue unit to investigate high ranking people and officials including the President and,
for extending the contract of one of his friends at SARS, Ivan Pillay for a period of 7 years and, for
paying him a pension of R1.7 million without the necessary authority to do so. Just four days before
the Minister delivered his budget; he was served with a letter by the Hawks to answer 27 questions
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concerning Ivan Pillay, the establishment of the rogue unit and other issues. The Minister of Police
and the Minister of State Security came out guns blazing indicating that Minister Gordhan was being
investigated for a protracted period of time, and that, the formation of the rouge unit was illegal.
Both these ministers belong to the inner circle of the President and, it is well known as to how the
Minister of Police defended the indefensible in respect of the Public Protectors recommendation that
the President pay back a part of the money of R276 million used to build his Nkandla homestead.
This indicates a clear plot against the Minister of Finance by the President. The Minister of Finance
had indicated that he has nothing to hide and, all the issues raised by Tom Moyane and the Hawks
were legal and sanctioned by the Cabinet. He met with the President and threatened to resign and,
told the President that, it is either him or Tom Moyane who had to go. The President indicated that
this was not possible and that, the Minister of Finance must cooperate with the investigation
instituted against him. The division at the ANC headquarters and the Union Buildings the seat of the
South African administration in Pretoria widened and, has split the ANC. It is unlikely that Gordhan
will heed the ultimatum. Economists are now warning that the high – profile battle could inflict long
– term damage on the economy with dire consequences for the livelihoods of South Africans”
(ENCA, SABC, ANN7 and the South African Media (2016).
Allies of the President state that Gordhan thinks he is above the law just because he is now the most
powerful minister in the cabinet. The Secretary General of the ANC stated that the timing of the
Hawks questions was an effort to destabilize the economy. Zuma’s office hit back at the Secretary
General saying it noted rumours and gossip which insinuate some conspiracy against the Finance
Minister. Another cause of tension between the both is the minister’s apparent determination to
remove the close friend and confidant of the President, chairwomen of the SAA Dudu Myeni from
the state – owned airline’s board. That the minister had informed the President about this move but
received no response from the President. The South African press indicated that these politicians
must understand that the Treasury battle was causing uncertainty that the beleaguered South African
economy can ill – afford. One thing is certain if either faction wins, all of this will place the
minister’s efforts to naught and that state – owned entities will be placed into the hands of
incompetent people and that, poor leadership will continue. It is the future of South Africa that is at
stake. This fight needs to be nipped in the bud” (Sunday Times, 2016: 1 – 2). In spite of the
strengthening of the US Dollar, the Shenanigans of the Machiavellian President saw the Rand
slipping to R16. 16. He moves from one crisis to another and South Africa cannot afford to have
Jacob Zuma in power for much longer.
The Mail and Guardian (2016: 2 – 3) points out that “Various people including other sources cite
evidence of what they perceive to be a growing spat between Zuma and Gordhan, which are the
following:
Zuma’s announcement of a plan to increase the salaries of public office bearers, albeit only
slightly, shortly before Gordhan presented a belt – tightening budget.
The announcement by the Treasury that it would review some of the big contracts awarded by
Eskom, including those involving the Zuma linked Gupta family; and
Gordhan thanking former finance minister Nene in his speech, to much applause from MP’s,
which was interpreted as a signal that they had not agreed with Nene’s firing. The President,
Jacob Zuma sat in Parliament a lost and lonely figure during the delivery of the Finance
Minister’s budget presentation.
The sense is that Jacob Zuma has dropped all pretenses and thus his Machiavellian behaviour
against Minister Gordhan is now unstoppable and, the relationship is destroyed beyond repair is
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the reality and, the country and the economy now comes a sorry second in his eyes. Gordhan will
be a serious casualty.” Can this assist the economy? The short answer is no - as South Africa
edges rapidly towards junk status.
UNFIREABLE” GORDHAN THREATHENS TO QUIT: IF MOYANE DOES NOT LEAVE
SARS
Some things only make sense with hindsight. Unless the President backs down in respect to his spat
with Finance Minister Gordhan, Alec Hogg (2016: 2) states that “The country’s reappointed Finance
Minister will quit. We will soon know if the Finance Minister is unfireable and, it would become
clear that Zuma’s ham – handed attempt to prepare the nation for another financial shock. Gordhan
said, if Moyane does not leave SARS, I go. Asked whether he now possesses the political clout to
effect, proposed reforms, Gordhan responded with “We will only know about that, if I am still sitting
in the seat in October, when the Mini – Budget is presented. He was deadly serious” (26 February,
2016 – 1 – 2). This is the grim reality as South Africa’s economic woes and shameless and frightful
politics, under the Machiavellian President, continue to wreck the country and, completely wreck his
legacy as one of South Africa’s worst President’s. In reality the President has no legacy to portray or
defend. Playing to the gallery President Jacob Zuma “denies rift and said that, he would not fire
Gordhan” (The Mercury, 2016:1). This statement was made by the President “As Gordhan received
more support from the South African Communist Party (SACP) which may just be the tip of the
iceberg and as forces rally behind Gordhan, Zuma is now increasingly vulnerable” (Business Day,
2016: 1 - 3). The President is vulnerable on the basis that the country awaits the verdict of the
Constitutional Court as to whether he can be impeached on the basis of lying to the nation and
compromising his oath of office, in respect to the building of his Nkandla homestead at the
exorbitant cost of R256 Million and, going against the recommendations of the Public Protector that,
he pays back the money for non – security costs. The South African courts are also dealing with the
spy case saga, the charges of which were previously dropped against him by his hand – picked
Director of Public Prosecutions. The President’s back is against the wall in – spite of the fact that he
survived a no confidence vote, supported by the ANC in Parliament on the 1st of March, 2016. ANC
MP’s served democracy a blow by voting for his survival in spite of his many indiscretions as a
President. South African democracy can never flourish, develop, mature and be consolidated by
ANC MP’s who vote against the grain of true democracy and, rely on patronage doled out by the
President. This is the grim politics of South Africa.
NO TIME TO TEST THE ABYSS AGAIN
The hounding of Gordhan does not bode well for the country. What we see is the reality that South
Africa has a shadowy unit of a discredited anti - corruption police, who are investigating the Finance
Minister and, effectively harassing him. There have been no findings against him. “It lends credence
to claims that this is part of yet another attempt to capture the last remaining institutions that have
not been taken over by special interests linked to powerful politicians. In this case, it would be the
same interests who stood to benefit from the removal of former Minister of Finance Nene”
(Editorial, Business Day, 2016: 1). Minister Gordhan’s removal would put paid to any chance of
averting a credit rating downgrade and, would be an economic catastrophe for South Africa. This
saga has almost sealed the country’s fate in respect of a sovereign ratings downgrade because, the
markets and investors cannot deal with a South African President that is surrounded with so much
controversy and, is erratic within the framework of his continuing Machiavellian behaviour, serving
his own interests and the interests of his political and business cronies whose success and positions
are built around him, doled out on vulgar patronage. Should a downgrade unfold, he is unlikely to
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retain the unquestioning support of the ANC leadership. “However, the political fallout unfolds; the
current ructions are not good for the country. The capture of state institutions is a systemic problem
that has undermined the country’s efforts to grow its economy. It is once more being pushed over the
edge only three months after the removal of a competent former minister of finance, Nene. There is
only one option left for South African’s, can they any longer put up with Jacob Zuma as President
and, have to question the political system that is in place, and ask how much of this they want to put
up with” (Editorial, Business Day, 2016: 14).
SOUTH AFRICA ON THE BRINK OF A BOND DOWNGRADE AS GDP GROWTH
TARGET FALLS DRASTICALLY AND THE ECONOMY ON THE BRINK OF
CONTRACTION AS DECLINE BITES
The GDP growth rate of the country has been downgraded to 0.5 percent. This spells disaster for the
growth trajectory” (Statistics, South Africa in The Mercury, 2016:2) and “indicators reveal that
South Africa being on the cusp of contraction because, it is on the brink of contraction, as the decline
bites hard and ratings agencies have warned that anemic growth heightened the risk to junk status”
(Business Day, 2016: 1). In other words the outlook for this year is weak and bleak. The effects of
the drought and the absence of growth together with the country failing to stop increasing
unemployment and poverty, together with an increase in electricity tariffs by 9.4 percent and, a
threat of a mining strike, inflation, interest hikes spell disaster for the country. These factors will
sharply curb spending by households and, coupled with a slowdown in government spending, all
spell gloom for the country’s economic growth prospects. “Growth was far from what would be
expected to achieve the objectives of the NDP, the statistician – general said. The NDP says 5
percent growth is needed every year until 2030 for South Africa to make inroads into poverty and
unemployment levels. This is impossible together with a fall in manufacturing, services and
commodities” (Business Day, 2016: 1). South Africa will not be in a position to pay its debt. The
Mercury (2016: 2) states that “Economists in general have predicted that growth in South Africa for
the last quarter would be as low as 0.4 percent compared with 0.98 percent for the same quarter in
2014 and 1.14 percent in 2013.”
Trust in South Africa plunges again and domestic policies floor the rand once more. Much of what
makes the rand vulnerable is self – inflicted. Topping the list are political decisions that have eroded
South Africa’s credibility. There are many reasons for rand weakness, including a President that fails
to understand how markets operate with his erratic behaviour, including a stronger dollar, slower
than expected economic growth in China, anemic Eurozone demand and continued woes in Japan.
These are the world’s largest markets, and are also significant export destinations for South African
goods and raw materials. The Business Day (2016: 12) reports that “Outflows from South Africa’s
equity and bond markets are speeding up and, by the end of January they were pegged at about R16
billion a month for the previous three months. It is difficult to see how the rand will recover if the
current account and trade deficits continue to widen. South Africa is importing far more than it
exports, a situation made worse by the movements in the exchange rate itself.” There will always be
questions about the levels of influence Gordhan has over economic policy at a time when rating
agencies and, investors are looking for a sustainable growth strategy.
The Treasury is tasked with macroeconomic policy coordination by the Public Finance Management
Act, but this to have been challenged, further eroding its standing. A key pillar in the effort to avoid
a crippling credit rating downgrade is an economic strategy and the Finance Minister in his Budget
failed dismally to outline a cogent intervention economic plan as rapidly as possible. It will be
impossible to get this done because there is no rule of law, the Cabinet is split and a President that
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simply does not care about the impending disaster of an economic downgrade, because he is caught
up in settling political scores rather than governing the country. This sends out a clear message that
in spite of the Minister of Finance’s good intentions, South Africa does not have the political ability
and maturity to do what is necessary to reassure investors and, avoid the inevitability of a sovereign
ratings downgrade that now looms on the horizon. This also means that South Africa will under
Jacob Zuma continue with risky behaviour that will cause the currency to decline, causing untold
harm to millions of ordinary people who have to deal with imported inflation, while incomes are
under severe strain. Sanity must prevail or we risk being deemed a failed state.
JUNK STATUS HINTS BY TWO RATINGS AGENCIES
Given what has been described above, two top ratings agencies signaled that South Africa could lose
its hard – earned investment – grade status this year, if economic growth falls short of expectations,
undermining the ambitious goals to reduce budget deficits and stabilize debt. The financial
credibility of South Africa is at grave risk, the agencies said. South Africa stands on the brink of a
precipice, credit ratings have steadily fallen. Lower – than expected growth was the main concern
said S&P and Fitch, which have given the country a credit rating of BBB -, the lowest investment
grade. In December, 2015 S&P put a negative outlook on the rating, which means that unless
circumstances change in the next 6 to 12 months or even much earlier, the next move is likely to be
downwards. Moody’s also slapped a negative outlook on its rating but this is a notch above the other
two. The likelihood of junk status like Brazil and Russia, South Africa’s Brics partners seems
inevitable for South Africa and, it will join these two economies into possible recession. Fitch was
more critical. “It emphasized that weak economic performance posed implementation risks and that,
fiscal tightening could harm the growth outlook. The lack of detail provided by the Finance Minister
in respect to tax increases of R15 billion budgeted over each of the coming two years undermined
credibility, and plans to slash the wage bill would also be challenging. The ratings agencies said that
the more ambitious fiscal targets were vulnerable to lower than expected growth. The announced
budget lacks significant policy announcements that we think would immediately spur growth, or
provide much needed business confidence to the private sector. The issue is also worrying and
totally exacerbated by social instability and we would watch this parameter very closely” (Mariam
Isa, 2016: 5).
Gordhan Lacked Clout to Deliver Rating – Rescue Budget Says the Opposition Democratic
Alliance
Linda Ensor (2016: 2) states that “Gordhan did not provide enough in the budget to boost economic
growth, and a sovereign rating downgrade to junk status is now a matter of time. The DA said that
the minister did not have enough political clout to deliver on economic growth and state – owned
enterprises. The DA also noted that the primary driver of economic growth in the NDP was
infrastructure development, but not enough was set aside in the budget for this. A total of 10 percent
of GDP should be spent on infrastructure development in terms of the NDP and the minister failed to
deal with this crucial issue and that spending on infrastructure will decrease between 2016 – 2017
and 2018 – 2019. We generally give the budget thumbs down said Maynier of the DA” (Linda
Ensor, (2016: 2). Other opposition parties said that cuts will make the defense force more of a
casualty.
GODHAN’S COMPLACENCY PAINTS OVER SA’s GRIM REALITY SAYS FORMER
COSATU BOSS
From the budget presentation Vavi the former Cosatu General Secretary said that “It gives the
impression that South Africa is a wealthy, peaceful country with a few little problems caused by
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world economic stagnation and the drought, neither of which the government wants to be blamed
for. He further added:
There is the grim reality of poverty, high unemployment, widening inequality and epidemic
levels of corruption that confront the majority.
That the minister was telling the ratings agencies that they have nothing to worry about and,
certainly nothing to justify downgrading South Africa to junk status and, that, there is anything
wrong and that the country is on the brink of revival.
The reality is that the crisis is getting worse and that the minister maintained the path of austerity
like his predecessors based on neoliberal policies of the 1990’s and its continuation in and with
the NDP.
He did not even make a token gesture of raising taxes of the rich and the fact that there is an
illicit flow of capital to tax havens depriving the country of trillions of Rands of unpaid taxes.
Social grants are to be increased, but well below inflation and generally there was much wrong
with his budget.
Nor was there any good news on the long awaited National Minimum Wage, Comprehensive
Social Security Plan and the NHI.
It remains an indictment. In reality a scandal that South Africa’s budget for universities as a
percentage of GDP is lower, at 0.75 percent, than the African average of 0.78 percent, the world
– wide proportion of 0.84 percent and the proportion spent by the OECD countries at 1.21
percent.
The alarming feature of the budget speech was not the use of the word privatization, but it was
clearly just that, and was a green light given to the capitalists.
The budget speech does not represent any new direction. It blatantly refuses to accept the
deepening crisis of poverty, unemployment and the inequalities or even the scale of corruption.
The budget was a continuation of the old business as usual ignoring the plight of the black
working class and the poor” (Vavi, 2016: 14).
In other words a radical approach was required by the minister and not tinkering with the system.
This is exactly what he has done by playing into the hands of politicians. What Gordhan and his
predecessors, have failed to do is recognize that South Africa is lacking a consistent ideological
position from the ruling ANC, and that is filtering into many aspects of South African life, including
this budget. He was unable to adequately tackle unemployment and inequality in this budget or
project decisively on much needed growth and as to how to deal with high unemployment rates. The
fear is therefore, that, another ratings downgrade notwithstanding, until the ruling government
tackles these issues, the country will remain economically troubled. The budget will not easily please
the ratings agencies.
THE ANC BLAME SHIFTING EXERCISE IS UNDER WAY
It has to be acknowledged that Finance Minister Gordhan was ultimately unsuccessful to pull two
rabbits, fiscal consolidation and economic growth, out of the budgetary hat. He was unable to set out
a compelling growth strategy, advance labour market reform, or remedy debilitating policy
uncertainty that continues to deter investment. Simply put, he lacks the political power to unravel
these complex ANC patronage systems” according to Butler (2016: 15). The boundaries of change
were set by cronyism, the power of public sector unions, antipathy towards the private sector and
public discontent about the economy. Gordhan received little support from his president Jacob
Zuma, who continues to be the lynchpin of parastatal patronage. It is obvious that the ANC
leadership refuses to look reality in the face. The ANC seems to be preparing itself for blame –
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